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Counting your Money. Excerpt from T-Shirts and Suits. A Guide to the Business of Creativity

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Counting your Money. Excerpt from T-Shirts and Suits. A Guide to the Business of Creativity Powered By Docstoc
					Counting your Money
An excerpt from ‘T-Shirts and Suits: A Guide to the Business of Creativity’ by David Parrish




34
 Counting your Money                   PAGE 1




This chapter emphasises the importance of                                                                 This financial section applies to not-for-profit                  Being clear about how much is needed – for capital
                                                                                                          organisations as well as commercial businesses. In                expenditure and working capital – is essential. Minimising
understanding and monitoring your enterprise’s                                                            fact in my own experience it sometimes requires more              purchases of equipment reduces funds tied up in fixed
financial health by looking at financial measures                                                         financial acumen to run a social enterprise, balancing            assets and cash remains free to provide the life-blood of a
from three different perspectives.                                                                        creative or social ideals with economic pressures to              business ie working capital – the money pumping through
                                                                                                          achieve the required financial outcome.                           the bank account to enable essential everyday payments to
It also covers raising funds and the importance of                                                                                                                          be made. If this working capital is insufficient, the business
                                                                                                          When I ask businesses about their weaknesses, usually one
generating future income streams both for investors                                                                                                                         could collapse despite having profitable projects in the pipeline.
                                                                                                          of the first answers I receive is “we don’t have enough
and your own long-term financial security.                                                                money!” Clearly, a critical lack of cash is a problem for any
                                                                                                                                                                            Three Ways to Count Money




‘
                                                                                                          business or social enterprise – new or established – and it
                                                                                                          can present barriers to thriving or even surviving.               The three ways of looking at the finances of any enterprise
                                                                                                                                                                            are through three financial windows, the Income and
                                                                                                          The financial barriers are real – or sometimes imaginary.
                                                                                                                                                                            Expenditure Account, the Balance Sheet and the Cash Flow.
                                                                                                          ‘Imaginary’ in the sense that people often imagine that to
                                                                                                                                                                            Each of these can be reports of past activity or projections
                                                                                                          start a new business requires immediately having all the
                                                                                                                                                                            anticipating a future situation. Each tells its own story and
                                                                                                          assets and trappings of a well-established enterprise:
                                                                                                                                                                            helps to plan a successful future: the creative entrepreneur
                                                                                                          equipment, offices, vehicles etc, when very often it needs
                                                                                                                                                                            needs to understand and use all three.
                                                                                                          less than they think. The question is not so much: How much
                                                                                                          money would we like ideally? A better question is: How little     The Income and Expenditure Account 17 shows the profit
                                                                                                          do we need to make the enterprise feasible? (either a new         made over a particular period, usually one year. (Even for
                                                                                                          business or an additional venture). Waiting for the day all the   not-for-profit organisations this is a crucial concept. The
                                                                                                          money arrives, from the bank, a funder, or the Lottery could      co-operative movement prefers the word ‘surplus’ and this
                                                                                                          mean it never happens. Success stories often start from           term can be substituted throughout the rest of this chapter
                                                                                                          meagre beginnings. Equipment can be hired or borrowed             if required.)
                                                                                                          rather than bought new, vehicles rented, offices can be shared
                                                                                                                                                                            The Balance Sheet shows the total value (net worth) of a
                                                                                                          (or virtual) and professional services can be traded. Growth
                                                                                                                                                                            business at a particular point in time. It’s a ‘snapshot’ of the
                                                                                                          can be organic rather than a sudden step-change and
                                                                                                                                                                            assets, liabilities and equity of the owners. The balance sheet




’
                                                                                                          managing on low overheads can be not only a useful discipline
                                                                                                                                                                            indicates the financial strength and capabilities of a business.
                                                                                                          in the early days but also the basis of a sustainable long-term
                                                                                                          financial strategy.                                               The Cash Flow Report shows where cash came from and went
                                                                                                                                                                            to in the past. Crucially, a cash flow projection indicates when
                                                                                                                                                                            cash is likely to come and go in the future, on a monthly or
                                                                                                                                                                            weekly basis in the foreseeable future. A cash flow projection
17 The Income and Expenditure Account can also be called a profit and loss account or income statement.                                                                     is a vital tool of financial management.
Counting your Money   PAGE 2




                               Financial accounts are the reports for legal and tax purposes        Controlling Costs
                               and tend to be produced long after the event. In contrast,
                                                                                                    There are two kinds of costs to control. Firstly variable costs
                               management accounts are for managers to use in real time.
                                                                                                    (the costs that will go up and down depending on the level
                               It is the information you need, when and how you need it, to
                                                                                                    of sales), because reducing variable costs will help make
                               enable you to keep an eye on what’s happening and guide the
                                                                                                    activities and projects more profitable.




‘
                               business through good and bad times.
                                                                                                    Secondly controlling fixed costs (the costs you are committed
                               Cash Flow – or lack of it – is the quickest killer so the
                                                                                                    to paying whether you’re busy or not) will help avoid cash flow
                               management of cash flow must be of most immediate
                                                                                                    problems and potential disaster during the leaner times. Low
                               concern in day-to-day management. As long as cash flow is
                                                                                                    fixed costs also enable you to be less dependent on constantly
                               healthy then rises or falls in profitability can be survived,
                                                                                                    high sales and so less desperate to bring in cash at any cost –
                               though unprofitable activities will hit cash flow sooner or later.
                                                                                                    for example having to do unprofitable projects for non-target
                               It’s vital to manage the cash flow but essential also to             customers – see Mando Group. Use your cash flow forecast
                               understand the profitability that creates cash. An effective         to see how soon a cash crisis could occur if business hits a
                               business person knows the profitability of each project in the       temporary downturn with different fixed cost scenarios. Being
                               enterprise, not just their combined total.                           able to survive the bad times sometimes amounts to having a
                                                                                                    philosophy of keeping fixed costs as low as possible.
                               Each project or department needs to make a contribution to
                               the overheads of the organisation as well as cover its own           One of the biggest costs is staff time and so this needs to be
                               direct costs. Or to put it another way, a proportion of core         monitored to get useful management information, control
                               costs need to be allocated to each project or department.            costs and increase profitability. Romanian branding company
                                                                                                    Grapefruit uses an automated system to record staff time
                               The balance sheet shows the value of the business at specific
                                                                                                    spent on projects, good practice learnt in the USA by the




’
                               points, past, present and future. This is public information for
                                                                                                    company’s Chief Creative Officer, Marius Ursache.
                               a limited company and gives outsiders a statement of the net
                               worth of a company in terms of fixed assets (equipment and
                                                                                                    Raising Funds
                               property), current assets (cash and bills receivable), and
                               current liabilities (overdrafts and bills payable). It is against    Raising funds is essentially a job of persuading investors that
                               these assets that the company might want to borrow funds.            they will get a return on their investment.

                               Many creative and cultural enterprises focus on sales                This applies whether it’s a bank that needs to know how you
                               (turnover) instead of profit. As they say, “turnover is vanity but   will be able to repay the capital and interest, or a shareholder
                               profit is sanity”. Even for social enterprises where profit is not   who needs to predict a return on investment from profits and
                               the prime concern, losses can be fatal. Clearly, profit is derived   dividends. A public funding agency will need to be assured of
                               from the difference between income and expenditure so the            your long-term survival so as to maintain ‘public benefit’ in
                               control of costs is essential too.                                   order to justify their investment from the public purse.
                                                                                                    (Financial viability may include match-funding from other
                                                                                                    sources or a degree of self-generated income.)
Counting your Money   PAGE 3




                               So whichever way you are looking for funds, the starting point is     Your Financial Control Panel
                               not the application form but the creation of a feasible business
                                                                                                     Finance and accounting are often regarded as the boring side
                               formula, in other words a sustainable ‘business model’, which




‘
                                                                                                     of business by creative people, but those who ignore it are not
                               will provide predictable financial results. It is essential to get
                                                                                                     in control of their business destiny. It’s like driving a car
                               the business formula right in the first place before writing it up
                                                                                                     without looking at the dashboard. Successful entrepreneurs
                               into a business plan. Mando Group obtained a number of
                                                                                                     don’t need to look at all the detailed financial information but
                               loans on the basis of its business plan, as did JAB Design.
                                                                                                     do need sight of the key financial measures. These are the
                               Predictions involve risk and the degree of predictability             equivalent of the car’s dashboard instruments showing the
                               depends on the investor’s attitude to risk. Investors are often       important information such as speed, fuel and oil pressure.
                               risk-averse and will require a charge on your assets. Intangible      The financial equivalents are profitability (per project and
                               assets such as intellectual property are notoriously difficult to     overall), cash flow and net assets.
                               use as security. Banks will insist that the risk is partly yours by
                                                                                                     What each enterprise needs is a simple but effective
                               taking guarantees based on your business assets or personal
                                                                                                     Financial Dashboard, constantly visible when driving the
                               property, whereas venture capital firms will generally accept
                                                                                                     business. More sophisticated measures include financial
                               more risk but expect a greater payback in terms of a large slice
                                                                                                     trends and ratios. Unless you have one eye on the profitability
                               of your business.
                                                                                                     and cash flow dials, you’re heading for a crash – or an empty
                               There are numerous schemes to provide start-up grants or              tank in the fast lane!
                               loans for specific types of business in particular regions. They
                                                                                                     A more comprehensive Business Dashboard will take
                               change so frequently that it is not worth being specific here.
                                                                                                     into account other vital indicators as well as the main
                               Seek financial advice from professionals, mentors, friends and
                                                                                                     financial measures.
                               support agencies to apply to loan guarantee schemes, to take
                               advantage of tax breaks or to obtain partnership funding.
                               It’s worth noting that as well as collecting taxes, HM Revenue
                                                                                                     Creating Financial Security
                               and Customs also provide extensive help and advice. Business          Financial security is derived from creating income streams
                               support agencies will have up-to-date advice and their                that are not dependent on your continuous labour. These are




 ’
                               contact details can be found on the website.                          the income streams that flow while you sleep. The things that
                                                                                                     create this cash flow can also be sold at a later date. In the
                               It should be noted that there are always conditions attached to
                                                                                                     creative industries, this is most obviously achieved through
                               grants and loans and the application process can take time
                                                                                                     the utilisation or exploitation of your intellectual property.
                               and possibly delay projects. In the worst cases I have seen
                                                                                                     Intellectual property rights, managed skilfully, enable a
                               inappropriate grant aid push organisations in the wrong
                                                                                                     creator to receive ongoing income from a variety of sources.
                               direction. Sometimes businesses ask for help to get grants
                               and loans when what they really need is a different business          In a nutshell, the business of creativity is the art of turning
                               model to make them stronger and less dependent on grants              creative talent into intellectual property that provides income
                               or loans. It is therefore advisable to assess the disadvantages       streams for the owners of that IP .
                               as well as the advantages of grants and loans before deciding
                               whether or not to apply for them.
Counting your Money          PAGE 3




This is an excerpt from the book ‘T-Shirts and Suits:
A Guide to the Business of Creativity’

                                                                                                 First published in 2005 by Merseyside ACME,
                                                                                                 303 The Vanilla Factory, Fleet Street, Liverpool L1 4AR.
                                                                                                 www.merseysideacme.com

                                                                                                 Copyright © David Parrish 2005

                                                                                                 The right of David Parrish to be identified as the author of this work has been
                                                                                                 asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

                                                                                                 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
                                                                                                 or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording,
                                                                                                 or otherwise, without the written permission of the copyright owner except in accordance with the
                                                                                                 provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued
                                                                                                 by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England. Applications for
                                                                                                 the copyright owner’s written permission to reproduce any part of this publication should be
                                                                                                 addressed to the publisher. Warning: The doing of an unauthorised act in relation to a copyright
                                                                                                 work may result in both a civil claim for damages and criminal prosecution.

                                                                                                 Disclaimer. Although every effort has been made to ensure the accuracy of the information
                                                                                                 provided in this book at the date of publication, readers are advised to check that the information
                                                                                                 supplied has not changed since going to press. The information contained in this book is of a
                                                                                                 general nature and the author and publisher cannot accept liability for its use in conjunction with
                                                                                                 a commercial or other decision nor for errors or omissions. The information contained herein does
                                                                                                 not constitute professional advice. Readers are advised to consult their own professional advisor.

                                                                                                 The examples in this publication are included purely as illustrations.
                                                                                                 No endorsement or criticism of any organisation or individual is intended or should be inferred.

                                                                                                 The views expressed in this publication are the author’s own and may not necessarily reflect those
                                                                                                 of Merseyside ACME.

                                                                                                 Designed in Liverpool by Mike Carney – www.mikesstudio.co.uk

                                                                                                 T-Shirts and Suits™ is a trade mark of David Parrish.




ISBN 0-9538254-2-6


The website associated with this book provides additional information, new material and
further case studies, details of training and consultancy projects, a framework for a business
plan, a glossary of terms and links to other useful websites.

www.t-shirtsandsuits.com

				
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